With the recent surge in oil prices I thought it would be useful to look at the potential impact with one set of data I watch. It is energy as a share of personal consumption expenditures or consumer spending. In the 1970s energy consumption rose from about 6% to 9% of spending, or about 50%. In the early 2000s energy rose from about 4% to 7% of consumer spending before it collapsed. As of December energy’s share of consumer spending was already back to 6% of spending, about the level it peaked at in the last cycle before the financial panic generated a drop in other consumer spending. If you look at energy consumption this way it appears that oil consumption was already at the point where futher oil price increases would rapidly impact consumer spending on other items.
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One area where higher oil prices clearly impacts consumer spending is autos, as consumer spending on new and used autos and energy have a very strong negative correlation. If rising oil prices generate a drop in real income or standard of living one of the easiest way to compensate is to delay buying a new,or used car. What would have been new monthly auto payments can be used to sustain consumption of other items. In this chart you can clearly see that this happened in both the 1970s and the 2000s. You can also see that spending on energy and autos accounted for about 10% of consumer spending in the 1990s and 2000s.
But the chart also shows that auto consumption was only about 3.5% of consumer spending at the end of 2010 as compared to a 5% to 5.5% norm in the 1990s and 2000s economic expansions. So the consumer does not really have the option to cut back on auto consumption like they did in the previous examples of oil price spikes. These charts suggest that if oil prices remain high or expand well past $100 we are quite likely to see consumer spending suffer across the board. Note that this chart of spending is based on nominal dollars.
Also note that Brent crude is already about $120 while West Texas Intermediate — the US base price — has only increased to about $100. This apparently is due to excess supplies in the Midwest because of a new oil pipeline from Canada. Such a divergence can only last so long, so that if oil supplies are interrupted for very long you can expect West Texas Intermediate to close on the Brent price fairly rapidly.